SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 40672/ November 12, 1998
Admin. Proc. File No. 3-9481
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In the Matter of the Application of |
|
STEPHEN B. CARLSON |
c/o Eric J. Peck, Esq. |
Lindquist & Vennum P.L.L.P. |
4200 IDS Center |
80 South Eighth Street |
Minneapolis, Minnesota 55402 |
|
For Review of Disciplinary Action Taken by the |
|
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.|
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OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY
PROCEEDINGS
Violations of Rules of Fair Practice
Conduct Inconsistent with Just and Equitable
Principles of Trade
Former general securities principal and president of former
member firm violated just and equitable principles of trade
when he used threats, coercion, and intimidation in an
attempt to obtain stock at below-market prices. Held,
association's findings of violation and sanctions are
sustained.
APPEARANCES:
Terrence J. Fleming, and Eric J. Peck, of Lindquist &
Vennum, P.L.L.P., for Stephen B. Carlson.
Alden S. Adkins, Norman Sue, Jr., and Jeffrey S. Davis, for
NASD Regulation, Inc.
Appeal filed: October 21, 1997
Last brief received: January 29, 1998
I.
Stephen B. Carlson, formerly the sole owner, general
securities principal, and president of Aspen Capital Group, Inc.
("Aspen" or "firm"), a former member of the National Association
of Securities Dealers, Inc. ("NASD"), appeals from NASD
disciplinary action. [1] The NASD found that Carlson attempted
to obtain stock at below-market prices by using a combination of
threats, coercion, and intimidation in violation of Article III,
Section 1 of the NASD's Rules of Fair Practice (the "Rules"). [2]
The NASD censured Carlson; fined him and Aspen $10,000, jointly
and severally; assessed costs of $1,852.30 against Carlson and
Aspen, jointly and severally; and barred Carlson from association
in all capacities with any member. We base our findings on an
independent review of the record.
II.
Carlson does not dispute that his conduct violated Article
III, Section 1 of the Rules. Rather, he asks that we modify the
sanctions imposed on him. Because his conduct is relevant to the
issue of sanctions, we describe Carlson's conduct below.
Carlson entered the securities industry in 1981. In 1985,
Carlson founded Aspen. Carlson was Aspen's sole owner, general
securities principal, and president during the time the
misconduct at issue occurred.
Aspen's primary business was short-selling stocks. [3] In
March, April and May of 1994, Aspen took a short position in the
stock of Teletek, Incorporated ("Teletek"). [4] On June 9, 1994,
Carlson had a telephone conversation with Lawrence Erber. At
that time, Carlson believed that Erber was a former member of the
securities industry and a convicted felon. Erber had, in fact,
pled guilty in February 1991 to the offenses of conspiracy to
manipulate stock prices and wire fraud. [5] Carlson also
believed that Erber was promoting and manipulating the price of
Teletek stock.
Erber, who had initiated the telephone call, taped the June
9, 1994 conversation. [6] During this conversation, Carlson
threatened to take steps to have Teletek delisted from the Nasdaq
stock market ("Nasdaq") unless he received discounted shares of
the company. Carlson bolstered this threat by suggesting that he
had previously been instrumental in the delisting of the
securities of American Gladiator ("GLAD"). [7] Carlson stated:
Let me tell ya, we were intimately involved in
getting GLAD delisted. OK? I am going to do
the same thing to Teletek -- unless I get some
stock from you on a favorable basis.
Carlson also threatened Erber with the exposure of his role as an
undisclosed owner of Paramount Securities, a broker-dealer. Such
ownership by Erber could have violated a federal court order
restricting Erber's participation in the securities industry. [8]
Carlson ended the conversation by stating that he would "go
after" Teletek unless Erber complied with Carlson's demand for
cheap stock. Both Erber and Carlson used profanity during the
course of the conversation. [9]
No further conversations occurred between Erber and Carlson.
Aspen subsequently covered its short positions in Teletek stock
in the open market and made a profit on its transactions.
Despite his statements to Erber, Carlson did not take any actions
against Teletek.
After the hearing, the District Business Conduct Committee
("District Committee") determined that Carlson had violated
Article III, Section 1 of its Rules during the June 9, 1994
telephone conversation. While Carlson's appeal was pending
before the National Business Conduct Committee ("National
Committee"), NASD staff made a motion to adduce additional
evidence and to remand the matter to the District Committee for
further proceedings. The motion was granted.
On remand, NASD staff introduced another audio tape into
evidence in an effort to show that Carlson's use of threats and
intimidation had not been confined to the June 9, 1994 telephone
conversation. The audio tape introduced by NASD staff at the
remanded hearing contained a discussion between Carlson and Brett
Bouchy (a broker at another firm) about the stock of Wholesome
and Hearty. Bouchy, who initiated the call, asked Carlson to
explain the basis of his opinion that Wholesome and Hearty stock,
then trading at a high of $9 3/8, was actually worth only $3 to
$4 per share. [10] Bouchy then told Carlson that he wanted to
"work something out." Carlson replied that he would "leave you
guys alone" if he obtained a block of 100,000 shares of stock at
$6 per share. After receiving a noncommittal response from
Bouchy, Carlson responded that he understood, but "that's where
I'm coming from. . . . if you guys want an olive branch, that's
the olive branch that I'm extending to you." [11]
After considering the additional evidence, the District
Committee nonetheless adhered to its earlier determination of
sanctions and imposed on Carlson a censure, a $10,000 fine
(jointly and severally with Aspen), a 30-day suspension, and
costs (jointly and severally with Aspen). The District Committee
stated that it had considered barring Carlson for his misconduct,
but found that several mitigating factors weighed against a bar:
Carlson did not carry out his threat to get Teletek delisted;
Carlson did not have a disciplinary history of similar incidents;
and Carlson had never received cheap stock from a promoter. The
District Committee further credited Carlson's statement that he
did not ordinarily conduct his business in this manner, and
concluded that the use of coercion and intimidating tactics
during the June 9, 1994 conversation was an isolated incident.
The District Committee also stated that in concluding the
misconduct was an isolated incident, it had reviewed the tape of
Carlson's conversation with Bouchy.
The National Committee affirmed the District Committee's
findings but increased the suspension to a permanent bar. [12]
Although the National Committee did not dispute the District
Committee's findings of mitigating factors, the National
Committee determined that the seriousness of Carlson's conduct
merited a bar. The National Committee concluded, "Carlson's and
Aspen's conduct so seriously undermined the fair and efficient
operation of the market and so clearly threatened the public's
confidence in those markets, that it cannot be tolerated, even as
a first violation."
We view Carlson's conduct as highly unethical and therefore
actionable under NASD Rules. [13] It is evident from both the
transcript of the June 9, 1994 conversation between Erber and
Carlson, and the audio tape itself, that Carlson used
threatening, coercive, and intimidating tactics in his attempt to
obtain Teletek stock at below-market prices. As Carlson
correctly concedes, this misconduct violates Article III, Section
1 of the NASD Rules. [14]
III.
As noted above, Carlson's sole contention on appeal is that
NASD's decision to impose a permanent bar is overly severe.
Section 19(e) of the Securities Exchange Act of 1934 governs our
review of the sanctions imposed by a self-regulatory
organization. [15] Consistent with that statutory provision, we
find no basis for concluding that the sanctions imposed here,
including the bar, are excessive, oppressive, or impose an
unnecessary or inappropriate burden on competition.
Carlson expresses regret for his misconduct during the June
9, 1994 conversation, characterizing it as an isolated event, and
points out that he has no similar disciplinary history in
fourteen years of participation in the securities industry. [16]
Carlson represents that he will refrain from such activities in
the future.
Carlson, however, committed a serious breach of his ethical
duties as a securities professional and violated the NASD Rules
by using threatening, coercive, and intimidating tactics during
his conversation with Erber on June 9, 1994. Moreover, Carlson
implicitly threatened Bouchy with adverse consequences by stating
that he would "leave you guys alone" if Carlson received a block
of shares at a significant discount. Although Carlson did not
use profanity in his conversation with Bouchy, the implied threat
of unpleasant consequences demonstrates that Carlson's use of
threatening, coercive, and intimidating tactics were not limited
to the June 9, 1994 conversation.
Under these circumstances, we share the National Committee's
view that Carlson's conduct was unacceptable. We sustain the
sanctions imposed by the NASD in their entirety as we do not find
that they are excessive, oppressive, or impose an unnecessary or
inappropriate burden on competition.
An appropriate order will issue. [17]
By the Commission (Chairman LEVITT and Commissioners
JOHNSON, HUNT, and CAREY); Commissioner UNGER concurring in the
Commission's findings and dissenting as to the sanctions imposed.
Jonathan G. Katz
Secretary
**FOOTNOTES**
[1]: Aspen was a respondent in the proceeding below. In January
1996, Aspen filed a Uniform Request for Broker-Dealer
Withdrawal. CRD reports that as of January 25, 1996,
Aspen's registration was "Terminated - BDW FILED." CRD
further reports that Aspen was expelled from NASD
registration on January 29, 1998 for failure to pay "fines
and/or costs."
[2]:The NASD has revised and renumbered its rules but has
made no substantive changes to the particular rule at issue
here. Article III, Section 1 of the Rules (now Conduct Rule
2110) requires adherence to "high standards of commercial
honor and just and equitable principles of trade."
[3]:Generally, "[s]hort sellers sell a security they do not
own by borrowing the security (often from a firm that holds
it in street name as security for a margin account) and
replacing it later with a security bought on the open
market. The short seller anticipates that the market price
of the security will fall between the time of the sale of
the borrowed security and the date of purchase of the
replacement security." Randolph K. Pace, 51 S.E.C. 361, 365
n. 19 (1993).
[4]:On March 31, 1994, Aspen was short 3,000 shares of
Teletek stock; on April 30, 1994, Aspen was short 27,000
shares of Teletek stock; and on May 30, 1994, Aspen was
short 62,300 shares of Teletek stock. Aspen also took short
positions in Teletek stock in late June and late July 1994.
[5]:See United States v. Larry Erber, 89 CR 681 (S.D.N.Y.
filed February 25, 1991) (order entering judgement of
conviction).
[6]:The Office of the United States Attorney in Los Angeles
provided NASD staff with a copy of the audio tape in
November 1994. The NASD entered a copy of the audio tape,
as well as a transcribed version of the audio tape, into the
record.
[7]:Carlson mentioned the delisting of GLAD to Erber because
he believed that Erber also had been involved in
manipulating the stock of that company.
[8]:See United States v. Larry Erber, 89 CR 681 (S.D.N.Y.
February 20, 1991) (injunction restricting Erber's
activities in the securities industry).
[9]:Carlson stated that he used this "rough" language
because Erber was a convicted felon who made his living
"stealing money from old ladies and IRAs and pension plans.
And I was trying to talk to him on his level."
[10]:Carlson's opinion about the value of Wholesome and
Hearty stock had apparently been published in "a couple
ofarticles."
[11]:NASD staff also presented testimony that GLAD had been
delisted from Nasdaq because the minimum bid price of its
stock, after a reverse merger, had dropped below $3 per
share. NASD staff argued that this evidence demonstrated
that Carlson had impliedly threatened to cause the delisting
of Teletek by manipulating the company's stock price
downward to below $3 a share. The District Committee was
unpersuaded by this argument and concluded that Carlson had
instead been threatening to bring Teletek to the attention
of the NASD, as he had done with GLAD, by alleging that the
company was engaged in stock fraud. The District Committee
further noted that, had Carlson threatened price
manipulation, it would have imposed more severe sanctions.
[12]:The National Committee affirmed the other sanctions
imposed by the District Committee.
[13]:See Jay Frederick Keeton, 50 S.E.C. 1128, 1134 (1992)
("As we have long recognized, [the requirement that
associated persons adhere to high standards of commercial
honor and just and equitable principles of trade] is not
limited to rules of legal conduct, but incorporates broad
ethical principles); Timothy L. Burkes, 51 S.E.C. 356, aff'd
mem., 29 F.3d 630 (9th Cir. 1994); Benjamin Werner, 44
S.E.C. 622 (1971).
[14]:Keeton, 50 S.E.C. 1128 (salesman's pursuit of
commissions by threatening to place a company's reputation
and financial position at risk, even if the claim for such
compensation was meritorious, violated NASD's requirement
that associated persons observe high standards of commercial
honor and just and equitable principles of trade); cf. Frank
J. Custable Jr., 51 S.E.C. 643, 647 (1993) (sustaining
NASD's finding that applicant, "an undisciplined salesman
who would say or do whatever it took to make a sale,
including using lies and threats" violated high standards of
commercial honor and just and equitable principles of
trade).
[15]:15 U.S.C. 78s(e)(2) (1997).
[16]:Carlson's prior disciplinary history consisted of a
$1,000 fine for a net capital violation, imposed jointly and
severally upon him and Aspen, in 1992. In October 1997,
after issuing its decision here, the NASD accepted an offer
of settlement in satisfaction of a complaint filed on July
10, 1996 alleging a net capital violation. Carlson and
Aspen were censured; jointly and severally fined $2,500; and
Carlson was further required to requalify by examination as
a financial and operations principal should he apply in the
future to become associated in that capacity with a member
firm.
[17]:We have considered all of the contentions advanced by
the parties. We reject or sustain them to the extent that
they are inconsistent or in accord with the views expressed
herein.
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 40672 / November 12, 1998
Admin. Proc. File No. 3-9481
-------------------------------------------------
In the Matter of the Application of |
|
STEPHEN B. CARLSON |
c/o Eric J. Peck, Esq. |
Lindquist & Vennum P.L.L.P. |
4200 IDS Center |
80 South Eighth Street |
Minneapolis, Minnesota 55402 |
|
For Review of Disciplinary Action Taken by the |
|
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.|
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ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED
SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it
is
ORDERED that the disciplinary action taken by the National
Association of Securities Dealers, Inc. against Stephen B.
Carlson, and the Association's assessment of costs, be, and they
hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary